New companies face an uphill climb that only gets steeper. As a first-time founder, it can be easy to misstep so it’s important to know the basic legal terms to help your startup survive and reach its goals.
In this issue of the Flash, we are defining five basic legal startup key terms every entrepreneur should know. For more key terms, please check out our Deal Dictionary which is designed to help entrepreneurs understand the jargon that comes up in discussions with investors and legal counsel.
This is a constitutional document for the company (but subordinate to the certificate of incorporation) and generally sets out the procedural rules that govern the company. Bylaws typically regulate the rules and procedures of director elections, board and stockholder meetings, officer appointments and their roles and responsibilities, and similar matters.
#2 Demand Registration Rights
This is a standard right given to investors in priced-round investments (i.e. investment raised through the sale of preferred stock, not convertible Promissory Notes). This entitles investors to demand, subject to certain requirements (e.g. investors demanding this have to hold a minimum percentage of shares), that the company register some shares of stock for a public offering, which facilitates the ability of the investor to liquidate some/all of its holdings.
#3 Investors' Rights Agreement
An agreement (typically put in place in connection with the company's first seed or series A round) that sets forth certain customary rights of investors, such as Pre-emptive Rights, Registration Rights, rights to obtain financial statements of the company and other information rights. This agreement will also typically include covenants by the company to do certain things, such as obtaining Key Person Insurance on the lives of its founders and insurance for the directors and officers of the company.
#4 Piggy-Back Registration Rights
This is a right typically given to investors alongside Demand Registration and S-3 Registration Rights. Piggy-Back Registration Rights entitle investors to have their shares included with any shares the company itself wants to sell and register for public sale (hence, the investors can sell their shares to the public by "piggy-backing" on top of the company's public offering).
#5 Proprietary Information and Inventions Agreement
The agreement employees of a company sign agreeing to assign the intellectual property created by that employee to the Company.
Also in this week’s Flash: